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Offer Stack Optimization in Electricity Pool Markets

Department of Mathematical Sciences, University of Technology, Sydney, Australia
Department of Engineering Science, University of Auckland, Auckland, New Zealand
Department of Statistics, University of Auckland, Auckland, New Zealand
philip.neame{at}uts.edu.au

We consider a generator making offers of energy into an electricity pool market. For a given time period, it must submit an offer stack, consisting of a fixed number of quantities of energy and prices at which it wants these quantities dispatched. We assume that the generator cannot offer enough power to substantially affect the market price, so the optimal response would be to offer energy at marginal cost. However, the market rules do not permit an arbitrary function, so the problem is to find an offer stack approximating marginal cost in a way that maximizes its profit. We give optimality conditions for this problem and derive an optimization procedure based on dynamic programming. This procedure is illustrated by applying it to several examples with different costs of production.

Subject classifications: Natural resources, energy: electricity pool markets; Dynamic programming, applications.
History: Received September 2000; revision received August 2001; revision received May 2002; accepted July 2002.